Soaring medical insurance costs are a sore spot for employers

SACRAMENTO — Soaring medical costs may drive up premiums paid by already beleaguered California employers for workers' compensation insurance -- after rates plunged 65% over the last six years.

Gov. Arnold Schwarzenegger, who forged major changes in the state workers' comp law in 2004 that slashed rates, has launched a bid to stop a potential 24.4% rate hike now being discussed in Sacramento.

California employers are required by state law to buy insurance to cover medical bills and disability benefits for employees hurt at work. The cost of these premiums have long been a political hot potato and especially so this year with the 2010 election campaign for a new governor already underway.

Any potential increase, business advocates say, also comes at a time when the economy is dismal and businesses are facing increases in the state's sales and income tax rates.

Retailers say they can't risk raising prices in the middle of a recession to pay for higher premiums. "Where do they think the extra 24% is going to come from?" said Roman Versch, the owner of a Pet Depot in La Verne and an animal hospital in West Los Angeles.

In 2003, Schwarzenegger campaigned on a promise to terminate out-of-control insurance costs that he said were driving companies and nonprofit organizations into bankruptcy. He succeeded spectacularly. The governor's overhaul became his signature political achievement, saving employers an estimated $40 billion over the last six years.

Now, those gains are being threatened by medical costs that are rising even faster than general medical inflation rates. On top of that, three recent legal decisions, if not reversed on appeal, are expected to lead to bigger monetary awards for injured workers who suffer permanent disabilities.

Word of a potential 24.4% increase in premiums came last week from an insurance industry-backed statistical agency that plays a key role in the rate-setting process for workers' compensation insurance premiums.

Under state law, the Workers' Compensation Insurance Rating Bureau is required to estimate how much workers' compensation costs have gone up and submit it to the state Department of Insurance.

The state insurance commissioner, as required by law, must consider the research and his own findings before issuing his own advisory to insurance companies for setting rates that take effect July 1.

Though the recommendation is nonbinding, it typically serves as a baseline for most insurers' new premiums.

Schwarzenegger has no role in the rate recommendation process, but he has quickly jumped into the fray. Even before the rate agency issued its findings, the governor publicly asked Insurance Commissioner Steve Poizner to reject the proposed rate increase.

"I'm extremely concerned about the impact this will have on business in California," the governor said. "Given our current economic environment, it is more important than ever that we protect the 2004 workers' compensation reforms."

Poizner, who is running for the Republican governor's nomination next year, said he would scrutinize the data from the rating bureau. He pointedly warned that he "will not allow California's job creators to be burdened with unnecessarily high workers' compensation costs."

Both business and labor unions agree that this is no time to raise rates. Their two representatives on the rating bureau's board voted in the minority against the rate hike proposal.

"There are other methods to bring costs down," said Angie Wei, the board member from the California Labor Federation.

But five insurance company appointees voted to recommend the increase. Insurers insist that the facts are on their side. They point to rating bureau statistics that show average medical payments for disputed claims from injured workers rose 27% from 2005 to 2007.

According to a study by the California Workers' Compensation Institute, average payments for pharmacy and durable medical equipment increased 43%, while medical case management costs jumped 51% and payments for medical-legal evaluations rose 58%.

"It's difficult to ignore what the rating bureau is saying. The medical costs are going up very readily," said Ken Gibson, vice president of the American Insurance Assn. in Sacramento.

Insurers need to be able to recover their costs so they can build reserves and pay claims, said Sam Sorich of the Assn. of California Insurance Companies. They could be threatened with insolvency, as happened to two dozen companies in the late 1990s, if their rates are too low, he said.

But insurers are also driving up the costs themselves by engaging in protracted legal wrangling and forcing patients to submit to multiple medical evaluations that don't involve treatments for injury or pain, said Lauren Papa, a Sherman Oaks chiropractor.

"Carriers spend more time and money fighting treatment that they wind up paying for anyway," she said.

Keeping a lid on workers' compensation costs helps all the players in the $11-billion-a-year program, cautioned Jason Schmelzer, a lobbyist with the California Chamber of Commerce.

"You can look at the history of comp, and every time there's a reform, such as 1993, 1997 and 2004, costs go down," he said. "Then they trend back up again as people adjust to the new system."